Thursday, 29 April 2010
Poor Fabulous Fab.
The young Frenchman went to all the right schools in Paris. He must have been good at math, because he got into Stanford. And then, it was onward and upward... He landed a job at Goldman. He was making millions. His girlfriend wrote to say how she'd like to curl up in his arms.
And then, at the tender age of 31, powee! Right in the kisser.
His beautiful derivatives lost 85% of its value in just 5 months, his clients get sore and now he's got a whole posse of senators on his tail.
The senate torturers didn't have any idea what Fabulous Fab was up to. They wouldn't know a derivative contract from a household fusebox. But they knew something had gone wrong. They knew the public was out for blood. And they knew the lights were on and cameras were rolling.
This was the time to impress the rubes back home. Get some Wall Street hotshot in the dock and grill him hard. And a Frenchman to boot! What luck.
I-N-D-I-G-N-A-T-I-O-N! The senators were positively shocked...shocked!... to discover that Fab...and Goldman...were out to make money. Maybe they thought the Goldman was a public utility - like Amtrak or the Post Office. Government services don't work very well, they may have told themselves, but at least they don't make any money!
Yes, senators can feign indignation when it is called for. But what are they so indignant about? Well, that's another matter. Who knows and who cares! The point is, the voters want to see them nail this little Frenchman....and they're going to make a good show of it.
The media reports suggest that everyone played along on Tuesday. The senators were indignant. The Goldman fellow denied any wrongdoing...but regretted that had sent the emails out. While the senators pretended indignation, the Frenchman's regret was certainly sincere. So was his denial. For, in fact, it's hard to know what he did wrong. Yes, he played his clients for suckers, but so what? That's what Fab Finance is all about - make money...and then dump the risk onto someone too dumb to know what he's doing. And then, when he blows up...and the whole system blows up...in come the senators to bail everyone out.
From Fab's perspective - and ours- if you can find bankers and hedge fund dim enough to take your derivative contracts - without wondering what is in them - you are performing a public service by separating them from their money. Better for the cash to be in the hands of someone who knows what to do with it - like Fabulous Fab himself.
But let us imagine that Fabulous Fab gets his hands on some real dough. And let's imagine that he is not in the mood to gamble on his own jackass derivatives...or to find some chump to sell them to.
What would he do with the money?
Ah...here, he would have to close his newspaper and turn off his television and think deeply about what is actually going on in the world. Forget the circus surrounding Goldman. Forget the news flow. Forget even the 'information' coming from the markets.
Now, it's time to think. This is real money we're talking about....not just casino chips.
Fab is no dope. He'd probably look at what is happening with Greek debt...and he'd be suspicious of all government bonds. After all, Greece's finances are not so different from a half-dozen other countries - including the US of A. True, Greece's debt problems have investors running to the relative safety of the US...which lowers borrowing costs for the US and makes it easier for the feds to finance their debt.
But the problem of too much public debt can't be solved by low interest rates and more debt. Eventually, the US runs into the same problem the Greeks face now. Only the US problem is even bigger...and there is no bigger, richer nation to bail it out.
Fab figures all of that out... He figures US lending rates may go down in the short run, but in the long run, the feds face the same predicament - they need to borrow more and more money just to keep the show on the road. And eventually, lenders will want higher interest rates. And it won't be too long before Moody's and Standard and Poor's take a hard look at America's balance sheet too.
The news yesterday was that the rating agencies may downgrade Spain, Portugal, and Ireland even further. And Reuters reported that the Greek debt alone would cost bondholders $265 billion - if Greece has to reschedule (that is, if Greece defaults on its loans).
Greece now. Then Spain. Then Ireland. Then Britain. Then America.
And more thoughts:
*** Our "Crash Alert" flag is still flying. It's been up there for so long it's gotten a bit faded and tattered. But we leave it up; we never know when we will need it.
The Dow bounced yesterday - up 53 points after taking a big fall on Tuesday. Gold rose $9...and seems, once again, to be readying for a move on the $1,200 level.
Which brings us back to Fabulous Fab. What would he do if he had some really big money? Would he buy stocks? If he's smart he'd stay away from them. This market could crack at any time. Stocks are cheap. And there are too many threats coming from too many different directions compared to the limited upside potential.
Would he buy bonds? Nope...bonds could surprise us all as de-leveraging resumes in earnest. They could be the only thing that resists a general turn-down in asset prices.
But who's going to bet on a depression? Not Fabulous Fab. If he had big money, he'd just want to park some money safely...not gamble on the outside chance of a deeper slump. So what does he do?
He buys gold. That is why gold continues to creep up. The big money wants to protect itself. And it's getting wary of government debt.
*** What's going on in Arizona? The state legislature has passed a law that allows the police to stop anyone on the street and ask him for his papers. If his papers are not in order, the fellow is in trouble.
The idea is to discourage illegal immigrants.
Here at the Daily Reckoning our views on immigration are about as unpopular as our views on everything else. We listen to CNN en Espagnol in the morning. From what we can tell, immigrants from across the border are doing the country a big service. And illegal immigrants are the best kind. They work cheap. They stay out of trouble. They use few public services. And they don't vote. What's more, they know how to dance.
If we were all illegal immigrants, the country would have a much healthier economy. Labor rates would fall to levels where we could compete with other exporters. Social costs - food stamps, unemployment compensation, social security, medicare/aid - would drop. And non-voters couldn't demand more bread and circuses from the legislature (currently, 47% of voters pay no taxes...).
Meanwhile, our old friend Jim Davidson thinks he's spotted a new trend. For the first time ever, he say, immigration - legal or illegal - is not a problem:
"Note that according to the Center for Immigration Studies, a think tank that agitates for tighter border controls, the number of illegal immigrants living in the United States declined to 11 million in 2008 from 12.5 million in 2007. For the first time since the depths of the Great Depression in the early 1930s, more persons appear to have left the U.S. than moved in."
This is typical of a nation in decline, says Jim. It's what happened to Great Britain after it lost its empire.
And now, there's a new phenomenon: the illegal EMIGRANT.
First this news item from the New York Times:
"WASHINGTON - Amid mounting frustration over taxation and banking problems, small but growing numbers of overseas Americans are taking the weighty step of renouncing their citizenship.
"The Federal Register, the government publication that records such decisions, shows that 502 expatriates gave up their U.S. citizenship or permanent residency status in the last quarter of 2009. That is a tiny portion of the 5.2 million Americans estimated by the State Department to be living abroad.
"Still, 502 was the largest quarterly figure in years, more than twice the total for all of 2008, and it looms larger, given how agonizing the decision can be. There were 235 renunciations in 2008 and 743 last year. Waiting periods to meet with consular officers to formalize renunciations have grown."
It is not easy to renounce your citizenship. If you are wealthy, the costs can be very high, as the feds try to punish you for leaving. Davidson comments:
"Just as there are "illegal immigrants" to the United States, so there are also now growing numbers of "illegal emigrants" from the United States. While statistics are necessarily sketchy, evidence suggests that there has been a dramatic upsurge in the number of U.S. persons living abroad. According to the Association of Americans Resident Overseas, (AARO) apart from the military and other U.S. government employees, 5.26 million US citizens reside abroad, a 67 percent increase since 2008. "Among the benefits the study cites of a life abroad are statistics that show expats earn more, pay less tax, have a better work/life balance, have an improved quality of life, enjoy broader cultural opportunities, and enjoy better job prospects."
"In the opinion of the U.S. State Department the AARO estimate is 25% too low. The State Department suggests that about 1.34 million Americans have become "illegal emigrants," which is to say that they have gone abroad and "fallen off the radar." As one report stated, "If an American living abroad stops paying their taxes, stops visiting the U.S., stops using embassy or consulate services they will not be OFFICIALLY counted anymore."
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.